Diverse Income Trust plc (LON:DIVI) Co-Fund Manager Gervais Williams caught up with DirectorsTalk to discuss the trust’s recent performance, the outlook for UK equities, income opportunities, and the liquidation and reconstruction proposal.
Q1: Gervais, I want to talk about Diverse Income Trust’s performance first. Share price is up around 11% year-to-date and 18% over the past 12 months. What do you see as the key drivers behind this continued upward momentum?
A1: I think the key drivers have really been that asset markets, global equity markets, have actually been surprisingly strong this year to date and that’s in spite of obviously higher energy prices and the open-ended uncertainty we have with the Iranian conflict.
It’s been quite a good year and that comes on from another good year last year for equity markets. Most global stock markets had quite a good year last year and so the fund has very much reflected that pattern. I think it’s actually partly down to the ongoing global growth. I think global growth has been quite good and specifically people are assuming that despite the uncertainties, the current results are continuing to be good, the prospects haven’t changed very much.
So, people are continuing to back individual stocks which are hopefully well positioned to continue to grow the dividends in the next few years.
Q2: With the UK market outperforming the US in recent months, do you think this creates a timely opportunity for investors to reassess their UK equity exposure and particularly smaller and medium-sized companies?
A2: What’s interesting is that we’ve always, the last two or three years, been expecting global investors, specifically those which have a lot of very volatile companies, growth stocks, often called high beta stocks, to start diversifying their positions by buying more into equity income stocks, which are companies which are less volatile but more importantly generate a large percentage of their return by the income stream they pay, the cash dividends. That’s been quite interesting, actually, because despite everything, if you go back to the end of, say, 2021 onwards, the FTSE 100 has actually kept pace with the FTSE World Index over that period. So, actually, the income shares have been doing better than many people might have assumed over the last few years.
If anything, we think that as more uncertainty comes, as you get perhaps global growth, perhaps being more affected by higher oil prices or tariffs and all the other things which are going on, then we think, ultimately, this pattern of change will become more established, and many more investors globally will buy into equity income funds. That will be a feature which actually is very good for the UK stock market, which is dominated by equity income stocks.
So, yes, we do expect the UK not just to perform, it’s performed, as I said, pretty well over recent years, but actually to start outperforming versus the World Index and indeed many of the global indices which it’s compared with.
Q3: Just looking at uncertainty, in the UK, we’re in a period of significant political uncertainty. The recent King’s Speech set out the new government’s legislative priorities. Which elements do you think are most relevant for UK listed companies? Could any of those shift the outlook for domestic equities?
A3: I think what’s been interesting about the new Parliament is that Prime Minister Starmer has set up an agenda which is very consistent with his previous two years and that is where people are. There is obviously a likelihood that he will suffer a leadership challenge. We may have a new Prime Minister in the coming months and if there were to be a new Prime Minister, the agenda might change, it might become more interventionist, for example. That might affect UK equities, particularly companies operating in the UK a little bit more than international companies.
The key feature about the UK stock market and the FTSE 100, for example, is that actually most of its earnings are generated overseas. So, from that point of view, you’ve got companies which are more interested in what’s going on in the international agenda and clearly Iran conflict and any potential settlement there, ongoing trade tariffs, issues with export bans. All of those things are probably going to be much more important in driving the UK stock market than actually any slight change in terms of the UK agenda and a different Prime Minister.
Q4: Has inflation and geopolitics killed the rate cut trade, do you think?
A4: I think interest rates are probably not going to be cut in the short term, even if there were an interim settlement in these rates from those in the next few days. Let’s hope there is. If some of the oil tankers there were released, that would obviously improve the supply of oil to the market but I’m not so certain that actually a lot of those ships will go back in. If it’s just an interim settlement and you’re taking on a risk that actually you’re going to be putting your ship into the Gulf and then not getting it out again because there’s some fallout in terms of the ongoing discussions with Iran and the US, then actually I think you may find that it’s a fairly subdued improvement in terms of supply of oil.
So going back to it, I think that the uncertainties are with us now. I think higher oil prices are probably going to be persistent, they could be much worse, and I think there will be an economic slowdown.
I think all of those factors point towards interest rates not going down in the very short term. If there were to be an economic recession, then I think we might get interest rate cuts later in this year or next year. Of course, would be associated with downgrades and more uncertainty.
Q5: Which parts of the UK market are best positioned if interest rates remain higher for longer?
A5: I think the key area which we’ve been cautious about has been consumer stocks, specifically petrol prices moving up. If you’re paying more for fuel, clearly, you’re less likely to spend money locally. So, I think quite a few of the domestically orientated companies are affected. As I say, there’ll be other features which are out there, extra energy costs, potential extra tariff costs, and those are probably going to be much more significant. They will affect UK domestic companies, but they’ll affect international companies as well.
It’s a case of actually looking at each individual company, each individual industry sector and being very confident that not only are they well positioned to sustain their current dividends but actually have the opportunity to generate more cash and more dividend growth. It’s quite a range of different outcomes and it can change, of course, with the news flow.
So, the bottom line is to actually be very cautious, have a broad portfolio, and be attentive to actually taking profits on some of those holdings if the prospects change.
Q6: Now, you’ve highlighted that some sectors are benefiting from the current environment. Could you talk us through three or four holdings that illustrate where you’re finding income growth and recovery potential?
A6: If you look at the current position of Diverse Income Trust, the largest three companies are:
- Yü Group plc (LON:YU), which is a UK utility company, which is particularly rapidly growing its market share at the moment. So, that will increase sales, cash, and profits.
- PayPoint plc (LON:PAY), which is a business which is involved in terminals for corner shops, local shops, but most particularly which is widening its range of services. They’re involved in collection of parcels and delivery of parcels. So again, a wider range of services.
- TP ICAP Group plc (LON:TCAP) is the third largest holding, which is a global broker in bonds. It’s one of the largest in the sector.
What’s interesting about those is they’re all very different and that really characterises the portfolio of The Diverse Income Trust, which is that it’s made up of a large number, almost 100 holdings, which are very different in their nature. Therefore, the outcome is not just relatively consistent income and income growth, but most particularly that there have been plenty of unexpected events this year and recently, that actually the portfolio will be relatively consistent.
Yü Group currently today has past dividend yields of 3.8%. PayPoint, which paid a very significant special last year, it paid a dividend yield of 15.9% over the last 12 months. TP ICAP, it’s about 5.8% yield. So, those are all good yields, but they’ve all grown well over recent years.
If prospects remain good, then hopefully the income will grow a lot further from here. It really just characterises the nature of the fund. The success is not just about buying individual companies where share prices go up. A large part of the return comes from the income and the income growth paid out by the portfolio holdings.
Q7: Finally, I just want to turn to the liquidation proposal for DIVI. The proposal proposed a reconstruction from voluntary liquidation and that gave shareholders the option to roll into the Premier Miton UK Multi Cap Income Fund or take cash, less the costs. Where does that process stand now? What should shareholders understand about the implications?
A7: So, the current position is that the General Meeting on the proposals has been approved by shareholders recently. The proposals will now go forward and in the later part of June, those people who will be getting cash will start to hear from the liquidators when their cheques are being paid out. That’s just on half of the fund. The other part of the fund will obviously merge with the Premier Miton UK Multi Cap Income Fund you mentioned and they will get their unit and new units paid to them and sent to them directly.
Alongside that, the Board has also declared a dividend, that’s the year just finished in May. So, the fourth dividend in place at final will be 2.04p, up from 1.35p last year and that reflects a large growth in income, but also some of the historic income which has already been retained as reserves.
On top of that, there is also a special dividend from the trading subsidiary of 0.54p, which will also become shareholders. The Board has also declared a new dividend for the current period from May through to late June when the reconstruction completes of 0.47p.
So, there’s a large number of dividends coming together with the reconstruction which will conclude, as I say, in the later part of June.
